Know the law and set goals for prudently investing your community association’s reserve funds to safeguard the future of your Utah Condo or HOA

Reserve Fund Investment Guidelines

What would you do if you found out the treasurer of your community association had taken the money earmarked for reserves and bet it all on black at a roulette table in Vegas? You might be just a tad upset! Win or lose, gambling with the association’s future is risky and dangerous. It goes against the fiduciary duty to which every board member is held accountable.

Playing the stock market or other risky investment options can be equivalent to that bet at the roulette wheel for condo and HOA reserves. And it may even be against the law.

But that doesn’t mean you should hide your association’s money away in the operating account and never invest either. Doing so is like leaving money lying on the ground and would be just as fiscally irresponsible as making high risk investments. The key to a healthy reserve is to find the balance between risky investments, and stagnation.

Understanding your options and building a comprehensive investment strategy is important to safeguard your HOA or Condo Association’s financial future. Here’s what you need to know:

First, Know the Law

Before you begin anything dealing with association investments, you need to know what standards your community will be held accountable to. State laws and your governing documents are the place to begin. Many states limit the types of investments allowed for community association reserves.

In the state of Utah, “’Reserve funds’ means money to cover the cost of repairing, replacing, or restoring common areas and facilities that have a useful life of three years or more and a remaining useful life of less than 30 years, if the cost cannot reasonably be funded from the general budget or other funds of the association. “

From Utah Code 57-8a-211.9:

    (a) Unless a majority of association members vote to approve the use of reserve fund money for that purpose, a board may not use money in a reserve fund:

(i) for daily maintenance expenses; or

(ii) for any purpose other than the purpose for which the reserve fund was established.

    (b) A board shall maintain a reserve fund separate from other association funds.

    (c) This Subsection (9) may not be construed to limit a board from prudently investing money in a reserve fund, subject to any investment constraints imposed by the governing documents.

So, according to the state law, the only thing you absolutely have to do with reserve funds is ensure they are specifically earmarked for repair/replacement/restoration, and that they are kept separated from your operating accounts. When it comes to investment strategy, Utah state law defers to the governing documents and only specifies that the money should be ‘prudently invested’.

Check Your Governing Documents

If your documents already outline an investment strategy, you are ahead of the game. Set aside a time at your next board meeting to review the strategy and discuss any amendments needed, or ways in which the community is not currently in compliance with the policy.

If your governing documents do not currently outline an investment strategy, it’s time for the board to create an investment policy. Your investment policy should outline how funds are to be invested, what insurances are required, who is responsible for making investment decisions, and any other special considerations. Remember that your investment policy is the safeguard to your community’s future, so it’s importance cannot be underestimated. We’ll talk more about crafting your investment policy later in this series.

Update Your Reserve Study

According to Utah law, reserve studies need to be conducted every 6 years, and updated at least every 3 years. Experts recommend updating reserve studies annually. An updated reserve study is critical to your investment strategy, as your reserve study will reveal important elements such as what needs to be replaced, when it is likely to need replacement, and an estimated cost of replacement. With these three pieces of information, you will know how much you need to have available and when.

As time goes by, costs of replacement change, technology changes and upgrades are made, and outside factors such as bad weather or erosion may cause replacement timelines and costs to change. Regularly updating your reserve study will help you stay on top of those changes and ensure that you can adjust your investments and your budget to prepare.

Consult Your Financial Advisors

No major policy change or investment strategy should go forward without first hearing the advice of the experts available to you. Consult with your community association management team or accounting team, your CPA, your reserve advisor and your financial advisor/broker/banker before taking any action.

Set Your Investment Strategy Goals

When investing reserve funds, there are several factors you need to consider:

  1. Protect the Principal by Reducing Risk
    The higher the risk of the investment you make, the more opportunity for loss of the original investment amount. Prudent investing means keeping the risk factor in mind to protect against loss. Insurance and low risk investment funds are the best way to ensure your reserve funds are safe.
  2. Ensure a Reasonable Return on Investment
    While protecting the principal is important, it’s generally not enough. Let’s say your reserve study says you’ll need to replace the elevators in your condo building in 20 years. It’s not enough to save for the cost of new elevators today, you must account for inflation, and save enough to cover new elevators 20 years from now. That is where your rate of return or the yield on your investments comes in. If the yield on bank savings account is 0.1%, but inflation is at 2.5%, the difference will need to come out of the pockets of your homeowners.
  3. Availability & Accessibility of Funds
    No amount of savings is useful if it is not available to you when you need it. Say you invest in a 10-year bond, but your roof needs to be replaced in 5 years. Either that money will not be available to you, or you may need to pay a penalty to get it early. You also may be subject to additional taxes you did not account for. For this reason, you should review your investments each time you update your reserve study.

Whether you are building a policy, or jumping in to begin investing, keep these goals in mind. In part two, we will discuss the options available to you, and how to craft an investment portfolio that works for your association.

Need Help with Your Strategy?

Are you a Utah Condo or HOA looking for a management company that can help you implement a sound investment strategy for your reserve funds to safeguard your community association’s future? Take advantage of this free strategic evaluation to see if HOA Strategies is a good fit for your community.